Airlines are indeed a great case! But accounting margins tell one very little about the surplus being allocated. Much of the apparent progressivity comes not from price discrimination but product differentiation, a much less fraught strategy. 1/

If people have the choice between a no-frills $200 ticket and a wider seat in row 3 for $2000 and they choose the wider seat, more power to ‘em. 2/

If Delta starts using fine-grained data analysis to sell the same seat to me for $1000 when I have a funeral to attend as it would have sold to me for $100 on a discretionary vacation, that will be bad. 3/

The relatively benign view you have of airlines comes from the fact that an important class of customers volunteers to pay a whole lot when they were free to choose an inexpensive offering if they wanted. 4/

If that’s what you mean by price discrimination then I’m all for it. But it’s not what (first-degree) price discrimination means. /fin

Yes. The long-term question is hard. In the narrow sense of allocating one conceptual production run, there is no aggregate gain in price discrimination, just a reallocation to producers. 1/

In the long-term, the question is how you sustain industries that structurally can’t survive with price set to marginal cost. One solution is to tolerate exploitation of market power, whether by restraining output or price discriminating. 2/

I don’t think that’s a good answer, but it is an answer. If you want to know what I think is a good answer, do I have a post for you! /fin drafts.interfluidity.com/2024/09/04/i...

So, I think we are talking past each other. Price discrimination vs a single price market does not involve a reduction of waste. The quantity transacted is identical to what would have been transacted under the market-clearing single price. 1/

I think you have in mind less formal scenarios, like involving price discrimination in allocating goods you’d otherwise have thrown away. 2/

It can be an interesting question whether price discrimination hurts consumers less than a producer with market power withholding output to support higher prices. 3/

But relative to the base case of a competitive single-price market, both of those choices create welfare losses for consumers in aggregate in order to benefit producers, at least within the narrow context of the allocation. 4/

(Producers will argue consumers net benefit over time because their businesses would not be sustainable absent some appropriation of consumer surplus relative to the competitive outcome, and withdrawal if their goods from the market would leave consumers worse off.) 5/

(But that’s a way of saying some important industries cannot survive under full competition, which is accurate and true. It’s not clear letting businesses unilaterally exercise market power is the best or fairest way to address that, though.) /fin

Price discrimination is the reallocation of surplus from consumers to producers. It doesn’t pass down, capturing the surplus is why producers like to do it. 1/

That’s not to say that things that look sort of like price discrimination can’t be good for consumer welfare. If grocery stores would have thrown away goods they sell somehow only to the poor for cheap, selling rather than throwing can be welfare improving! 2/

But where the goods would have been allocated in a single price competitive market absent price discrimination, the price discrimination is a pure loss to consumers in aggregate. 3/

If the price discrimination isn’t perfect some consumers may benefit at the expense of others. That’s the basis for the progressivity claims. But the putatively virtuous redistribution helps launder a drain against consumers in aggregate. /fin

Price discrimination is conceptually independent of production processes and efficiency. The analysis begins with supply and demand curves, representing the production processes and consumer preferences. 1/

Single-price market and price discrimination are different ways of allocating transactions within those curves. 2/

That’s not to say that in practice and the messy world of real life, there might not be some side channels by which an expectation of a capacity to price discriminate (or not) somehow conditions the production processes. But that would be a pretty second-order and bespoke kind of claim. /fin

It’s a common claim that price discrimination can be progressive. And in a very narrow sense it can be. That’s the argument made by people (ironically) “on the right”. 1/

People “on the left” tend to emphasize that it’s negative sum for consumers, and where it is “progressive”, the burden for that progressivity is unjustly concentrated on more affluent purchasers of the same good rather than shared more broadly or fairly. /fin

It doesn't have anything to do with productivity, except in a financial sense of profit. 1/

Perfect price discrimination is "efficient" in the sense that any transaction that would be net-worth-it to the two parties is made. 2/

It's distributionally very skewed. The consumer gets "epsilon"—infinitessimal benefit, barely finds the transaction worthwhile—while the seller appropriates all the surplus. /fin

it's weird that it's people "on the left" who argue for single-price markets and redistribution of purchasing power, while people "on the right" argue for price-discrimination as the best redistributative tool. 1/

i guess the cynical explanation is that while price discrimination redistributes among consumers, it's only gravy on the producer side, for the asset-owning class. /fin

We decide! There are lots of different taxes, e.g. payroll taxes. Most of them are financing taxes in some sense (taxing away funds that would otherwise have been spent), rather than distribution shaping, though all taxes to some degree affect both. 1/

We want financing taxes to be "fair" in their burden (always contested). There is some advantage to dividing financing across multiple smaller levies rather than concentrating them in one big thing (like a VAT), as that reduces incentive to game the one-big thing, makes evasion more complicated. 2/

Plus, taxes can have other purposes entirely, incentivizing or disincentivizing particular behaviors. For example, some people favor land-value taxes on the theory that it encourages more value (and usually density) in structures. 3/

Dividing the current role of income taxes into VAT + highly progressive, high-income, high-top-marginal rate taxes doesn't imply a position on those debates one way or another. /fin